Question

Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year D1 $3 00, and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?

Answer 1

The cost of common equity is 13.33%

Step-by-step explanation:

current price (Po) = $36

dividend (D1) = $3

growth rate (g) = 5%

let the cost of common equity be r

Po = D1/(r - g)

$36 = $3/(r -0.05)

r = 3/36 +0.05

= 0.1333

Therefore, The cost of common equity is 13.33%